More CRA Idiocy

"The national wave of home foreclosures, many
concentrated in lower-income and minority neighborhoods, has created a
strong temptation to find the villains responsible."

What can you say about an Op-Ed whose very first sentence is a giant
pile of steaming bullshit? That statement is demonstrably false. As the
prior post on foreclosures shows, the concentration is mostly middle class and upper middle class white suburban neighborhoods.

California leads the nation in foreclosures. The state’s foreclosure
activity was up 51% from a year ago. These are not CRA communities,
they are what were hoped to be surburban bedroom communities east of
the major cities (San Diego and L.A.)

Case-Shiller Index falls 17.4%

The September S&P/Case-Shiller Home Price Index of 20 US cities
fell 17.4% year over year -- that is the most on record and is now down
21.7% from its high in July '06. On a month over month and year over
year basis, all 20 cities saw declines.

Existing Home Sales Record Price Drop

Sales of existing homes dropped 3.1% from the prior month in
October, and slipped 1.6% from the previous year. Total housing
inventory fell 0.9%. percent to 4.23 million existing homes available
for sale, which represents a 10.2-month supply at the current sales
pace, up from a 10.0-month supply in September. Single-family home
sales declined 3.3 percent to a seasonally adjusted annual rate of 4.43
million

Prices fell by the most on record: Median price fell 11.3%
($183,300) from a year earlier. This is the largest year-over-year
existing home price decrease since records began in 1968.

Valuing Homes ex-Foreclosures

Here's a little bit of pushback on the indices showing how terribly
elevated home prices are, and why they likely have more to fall.

The WSJ Numbers Guy column, written by Carl Bialik, looks at various indices -- Case Shiller, OFHEO FHFA, etc. As the charts at bottom reveal, they all show a boom, elevated prices and a rollover.

"The one point of widespread agreement in the
real-estate industry is that there is no single accurate index of home
prices. They are all over the map, cover different sets of homes and
may exclude parts of the country or be unduly influenced by the mix of
homes sold in a given month.

Underwater Homes in Bay Area

No, not flooding -- underwater in terms of owing more than the home is worth:

"Twenty percent of Bay Area homeowners owe more on their
mortgages than their homes are worth, according to a study being
released today. This dubious distinction has entered the American
lexicon as an all-too-familiar term - being underwater.

As home values continue to plunge, the real estate valuation service
Zillow.com said that 20.76 percent of all homes in the nine-county Bay
Area are underwater. The rate is much higher than the national average
of 1 in 7 homes, or 14.3 percent. That's because the Bay Area - like
most of California - was a classic bubble market, where buyers in
recent years paid overinflated prices for homes that now are rapidly
losing value in the market downturn."

Mark-to-Modified Market (the Home Game Version)

Housing prices remain elevated, inventory overhang is huge,
cancellations are still rampant, credit is tight, and foreclosures are
still rising. It is in this environment that several new plans to
modify loans are starting to be enacted:

Fannie Mae and Freddie Mac are expected to announce
plans Today to speed up the modification of hundreds of thousands of
loans held by the housing finance giants. The GSEs will reduce
principal or interest rates on some loans and extend the terms of
others. The program is an extension of the Hope Now alliance.

The effort will target certain loans that are past due and will aim
to bring the ratio of household debt to income for these borrowers down
to 38%

Citigroup is contacting 500,000 homeowners with $20 billion in
mortgages during the next six months. About 130,000 mortgage customers
are expected to qualify.

JPMorgan Chase (and their Washington Mutual acquisition) announced
plans last week to cut monthly payments by lowering interest rates and
temporarily reducing loan balances for as many as 400,000 homeowners.

The Thundering Herd . . . "Were Pigs"

“The mortgage business at Merrill Lynch was an
afterthought — they didn’t really have a strategy. They had found this
huge profit potential, and everybody wanted a piece of it. But they
were pigs about it.”

-- William Dallas, founder of Ownit Mortgage Solutions, a lending business in which Merrill bought a stake a few years ago.

TYPICAL of those who dealt in Wall Street’s dizzying and
opaque financial arrangements, Merrill ended up getting burned, former
executives say, by inadequately assessing the risks it took with
newfangled financial products — an error compounded when it held on to
the products far too long.

The fire that Merrill was playing with was an arcane instrument
known as a synthetic collateralized debt obligation. The product was an
amalgam of collateralized debt obligations (the pools of loans that it
bundled for investors) and credit-default swaps (which essentially are
insurance that bondholders buy to protect themselves against possible
defaults).

Synthetic C.D.O.’s, in other words, are exemplars of a type of
modern financial engineering known as derivatives. Essentially,
derivatives are financial instruments that can be used to limit risk;
their value is “derived” from underlying assets like mortgages, stocks,
bonds or commodities. Stock futures, for example, are a common and
relatively simple derivative.

Among the more complex derivatives, however, are the
mortgage-related variety. They involve a cornucopia of exotic,
jumbo-size contracts ultimately linked to real-world loans and debts.
So as the housing market went sour, and borrowers defaulted on their
mortgages, these contracts collapsed, too, amplifying the meltdown.

The synthetic C.D.O. grew out of a structure that an elite team of
J. P. Morgan bankers invented in 1997. Their goal was to reduce the
risk that Morgan would lose money when it made loans to top-tier
corporate borrowers like I.B.M., General Electric and Procter &
Gamble.

Regular C.D.O.’s contain hundreds or thousands of actual loans or
bonds. Synthetics, on the other hand, replace those physical bonds with
a computer-generated group of credit-default swaps. Synthetics could be
slapped together faster, and they generated fatter fees than regular
C.D.O.’s, making them especially attractive to Wall Street.

Michael A. J. Farrell is chief executive of Annaly Capital
Management, a real estate investment trust that manages mortgage
assets. A unit of his company has liquidated billions of dollars in
collateralized debt obligations for clients, and he believes that
derivatives have magnified the pain of the financial collapse.

“We have auctioned billions in credit-default swap positions in our
C.D.O. liquidation business,” Mr. Farrell said, “and what we have
learned is that the carnage we are witnessing now would have been much
more contained, to use that overworked word, without credit-default
swaps.”

The Housing Crisis Is Over

Mr. Moulle-Berteaux, along with Barton Biggs, is a partner of Traxis Partners, a hedge fund firm based in New York.

They have had a series of disasterous calls recently: Shorting Oil
three years ago at $50, and a mere 6 months ago, this horrific call in
the WSJ, declaring the end of problems in residential real estate: The Housing Crisis Is Over.

Ouch!

There is an important lesson here for investors. Read this, and them join me at the other end:

The dire headlines coming fast and furious in the financial and popular press suggest that the housing crisis is intensifying. Yet it is very likely that April 2008 will mark the bottom of the U.S. housing market. Yes, the housing market is bottoming right now.

How can this be? For starters, a bottom does not mean that prices
are about to return to the heady days of 2005. That probably won't
happen for another 15 years. It just means that the trend is no longer
getting worse, which is the critical factor.

Most people forget that the current housing bust is nearly three
years old. Home sales peaked in July 2005. New home sales are down a
staggering 63% from peak levels of 1.4 million. Housing starts have
fallen more than 50% and, adjusted for population growth, are back to
the trough levels of 1982. Furthermore, residential construction is
close to 15-year lows at 3.8% of GDP; by the fourth quarter of this
year, it will probably hit the lowest level ever. So what's going to
stop the housing decline? Very simply, the same thing that caused the
bust: affordability.

The boom made housing unaffordable for many American families,
especially first-time home buyers. During the 1990s and early 2000s, it
took 19% of average monthly income to service a conforming mortgage on
the average home purchased. By 2005 and 2006, it was absorbing 25% of
monthly income. For first time buyers, it went from 29% of income to
37%. That just proved to be too much.

Prices got so high that people who intended to actually live in the
houses they purchased (as opposed to speculators) stopped buying. This
caused the bubble to burst.

Since then, house prices have fallen 10%-15%, while incomes have
kept growing (albeit more slowly recently) and mortgage rates have come
down 70 basis points from their highs. As a result, it now takes 19% of
monthly income for the average home buyer, and 31% of monthly income
for the first-time home buyer, to purchase a house. In other words,
homes on average are back to being as affordable as during the best of
times in the 1990s. Numerous households that had been priced out of the
market can now afford to get in . . .

In the past five major housing market corrections (and there were
some big ones, such as in the early 1980s when home sales also fell by
50%-60% and prices fell 12%-15% in real terms), every time home sales
bottomed, the pace of house-price declines halved within one or two
months.

I recall reading it at the time, and saying to myself: "Wow, that is
simply awful analysis." Hence, the diary for 6 months later and the
current look back.

The logic errors within are myriad: Comparing different time periods
and expecting identical parallel results, the failure to recognize how
significant the credit crunch was, the extrapolation from past lows to
present using insufficient variables, the failure to use traditional
metrics of affordability, such as median home price to median income or
price of rent versus own ratios, and lastly, the unsupported assumption
that a 15% drop over 3 years, after a 100% increase was sufficient to
make homes affordable.

If I was grading this, it would get a D minus.

The lesson you should take away when you read dumb things from smart
guys running big piles of cash: They are talking their books, and
having drank the Kool-aid, have little or no objectivity.

Pending Home Sales Index: Not Bad . . .

Here's something that almost never happens: An NAR release came out, and I think its better than the NAR does!

The Pending Home Sales Index -- based on contracts signed in
September -- declined 4.6% to 89.2 from the upwardly revised 93.5 in
August. That is pretty awful, but is 1.6% higher than September 2007
(87.8). And as we have so painstakingly detailed, its the year over
year data that is significant.

Year over year, the number has improved. As the table below shows,
its doing so for one reason: Huge price decreases in the West have led
to giant increases in sales.

We noted Monday, sales in California have gone up as prices have fallen.

Disclaimer

Disclaimer

The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.